New Delhi (ABC Live): Indian arbitration law is undergoing a major reset. For years, arbitral tribunals regularly awarded compensation for losses that government contracts had clearly prohibited. As a result, disputes over idle machinery, overhead losses, and loss of profit flooded courts under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.

However, in December 2025, the Supreme Court delivered a turning-point order in State of Jharkhand v. The Indian Builders, Jamshedpur (2025 INSC 1388). Instead of deciding the case in isolation, the Court took a far bigger step. It formally referred to the 2009 precedent of Bharat Drilling & Foundation Treatment Pvt. Ltd. v. State of Jharkhand to a larger Constitution Bench for reconsideration.

At the heart of this move lies one powerful question:

Can an arbitrator award claims that the contract itself expressly prohibits?

Until now, many High Courts have relied on Bharat Drilling to justify such awards. Now, however, the Supreme Court has openly questioned whether that understanding is legally sound at all.

What Was the Dispute in the Jharkhand Case?

The case arose from a government construction contract in Jharkhand. The contract contained strict “no-claim” clauses, including:

• Clause 4.20.2 – No claim for idle labour or idle machinery

• Clause 4.20.4 – No claim for business loss or loss of profit

Despite these clear restrictions, the arbitral tribunal granted:

• Compensation for underutilised overheads

• Compensation for idle tools and machinery

• Compensation for loss of profit

Initially, the Civil Court set aside these claims under Section 34, holding that the tribunal had acted against the contract. However, the Jharkhand High Court restored the award under Section 37, relying solely on Bharat Drilling without examining the contract itself.

When the matter reached the Supreme Court, the State of Jharkhand raised a serious concern. It argued that Bharat Drilling was being misapplied across the country to bypass prohibitory clauses in government contracts.

What Are “Barred Claims” in Arbitration?

In simple terms, barred claims are claims that the contract itself says:

“You cannot claim this.”

These usually include:

• Idle machinery charges

• Idle labour costs

• Loss of expected profit

• Business interruption losses

Such clauses are common in EPC, infrastructure, and government contracts. They exist to protect public funds and to prevent speculative compensation.

However, after Bharat Drilling (2009), many arbitrators began to treat these clauses as binding only on the government — not on the arbitral tribunal itself. As a result, barred claims re-entered arbitration through indirect valuation tactics.

Why Did the Supreme Court Question Bharat Drilling in 2025?

The Supreme Court has now made three crucial observations:

1. No Clear Legal Ratio in Bharat Drilling

The Court found that Bharat Drilling never properly analysed the contractual clauses at all. Instead, it relied on a judgment dealing with interest under Section 31(7) — a completely different legal issue.

As a result, the Court noted that Bharat Drilling does not lay down a true binding legal principle on barred claims.

2. Contract Is the Foundation of Arbitration

The Court strongly reaffirmed that:

Arbitration exists only because the contract exists.

Therefore, if the contract prohibits a claim, the arbitrator’s jurisdiction itself stands restricted.

The Court relied on modern arbitration rulings, such as:

• CORE v. Railway Electrification (2024) – Party autonomy is the backbone of arbitration

• Pam Developments v. State of West Bengal (2024) – An arbitrator cannot award what the contract prohibits

3. Interest Cases Cannot Justify Barred Claims

The Court clarified that interest awards arise from statutory power under Section 31(7). In contrast, barred claims arise purely from contractual agreement. Therefore, earlier interest cases cannot justify ignoring prohibitory clauses.

What Did the Supreme Court Finally Decide?

Instead of overruling Bharat Drilling directly, the Supreme Court adopted a cautious and institutionally sound approach.

It directed that:

The correctness of Bharat Drilling must be examined by a Larger Bench.

Accordingly, the matter now awaits authoritative settlement by a bench of higher strength.

How This Case Changes Arbitration Law: Comparative Impact

1. With Pam Developments (2024)

In Pam Developments, the Court already held that awarding idle machinery charges against a contractual prohibition amounts to patent illegality. The 2025 Jharkhand order now elevates this principle into a broader constitutional-level conflict with Bharat Drilling.

2. With EC v. Bright Power Projects (2015)

That judgment rejected creative attempts to disguise barred claims under alternate heads. The 2025 order now strengthens this logic by questioning the very precedent that enabled such bypasses.

3. With Delhi Airport Metro (2022)

Delhi Metro focused on irrational financial modelling and perverse valuation. In contrast, the Jharkhand case goes one step further. It treats barred claims as a jurisdictional defect, not merely an error of calculation.

4. With Cox & Kings (2024)

• Cox & Kings* clarified that only those who consent can be bound by arbitration. The Jharkhand order extends that logic to claims themselves:

Consent defines who arbitrates and what can be arbitrated.

What This Means for Government Contracts and EPC Projects

This reference has massive real-world consequences:

✅ It strengthens risk protection for government agencies
✅ It curbs speculative contractor claims
✅ It restores certainty in EPC and infrastructure contract pricing
✅ It reinforces Section 34 scrutiny for jurisdictional illegality
✅ It boosts investor confidence in contract enforcement

At the same time, until the Larger Bench settles the question, some uncertainty will continue in enforcement proceedings.

Why the Larger Bench Decision Will Be Historic

The Larger Bench will finally decide:

• Whether prohibited claims affect the jurisdiction itself

• Whether awarding barred claims amounts to patent illegality

• Whether Bharat Drilling should be overruled, confined, or declared per incuriam

Whatever the outcome, it will shape Indian arbitration for the next decade.

Conclusion: Why This Judgment Matters

In summary, the Supreme Court’s decision to revisit Bharat Drilling and barred claims marks a clear shift back to contract supremacy in arbitration. If the Larger Bench confirms this view, arbitrators will no longer be free to bypass contractual prohibitions through equity-based reasoning.

Ultimately, this case may redefine the thin line between party autonomy and arbitral discretion in Indian commercial law.